Indian Billionaires: Living in Sin!

AUTHOR’S PROFILE

ROHIT KAPUR is a leading voice in the Indian and global aviation world. Having worked in leadership roles, he has experience across all dimensions of the private aviation industry, be it aircraft sale, operations, charters, MROs and product support. He has represented leading brands such as Gulfstream, Eurocopters (now Airbus helicopters) Hondajet, Beechcraft. Jet Aviation, JSSI to name a few. He was also the Founding President of BAOA and served as its President till 2019. Presently, Rohit is the Managing Partner of The Jet Company LLC, a Dubai based Aircraft Brokerage and Consulting Company, with focus on clients in India, Middle East and SouthEast Asia. He continues to be a voice on matters that are affecting the growth of the aviation industry in India.

Imagine, for a moment, that you were an Indian business leader, running a multi-billion-dollar company. The chances are that your company owns at least one private jet or helicopter, if not more, to facilitate the movement of your senior management to various plants and factory sites, or for meetings for business purposes. This aircraft would allow you to travel securely and allow you the flexibility to use it as per your schedule. It would also allow you more productive time with your company leadership and would eventually add to the productivity and profits for your company, which in turn, would add jobs for the country, and also give a boost to the national GDP. Sounds logical, right? Well, no surprises, that’s not how the Indian taxman feels! He feels that you are living a life in “Sin”, to the extent that your aircraft is a “Sin good” item! In real terms, it simply means that as per the taxman, the use of the private jets is a national wastage, and harmful for the Indian economy, and should be taxed to the extent that you are discouraged to use it. And to add insult to injury, he has clubbed you with the tobacco, gutka and pan masala users of the nation, the ultimate “sinners’ in their eyes. You must be discouraged at all costs! So much for logic!

For a very long time, the government has treated the private aviation sector as a luxury item, something which the rich indulge in along with their Ferraris, and the Luxury Yachts. This has resulted in India having one of the highest tax regimes for private aviation anywhere in the world (See Appendix 1). There is a deeper issue here which relates to optics, perceptions and a lack of understanding amongst policy makers regarding this crucial segment of the Indian economy. Let’s analyse this with certain facts and figures to put things in perspective.

NSOP VS PRIVATE

Indian private aviation is divided into two segments, depending on how the aircraft is to be used after import into the country. The first one, is the Non-Scheduled Operators Permit (NSOP), which allows the aircraft to be used only for commercial charters, and every flight has to be compensated with a financial reimbursement (the charter cost), including an 18 per cent GST paid to the Government of India (GOI). This has recently been increased from 12 per cent to 18 per cent in GST 2.0. This aircraft cannot be used for any flight which is not invoiced, unless it is a training or maintenance flights. So even if the owners want to use it for themselves, they will have to pay the market rate for the hire, plus the GST as applicable.

FLYING PRIVATELY ALLOWS THEM TO MAXIMISE THEIR TIME, AND EFFICIENCY IN WAYS THAT NO OTHER BUSINESS TOOL CAN PROVIDE. A NBAA STUDY SAYS THAT A CEO WHO USES HIS COMPANY AIRCRAFT FOR ABOUT 400 HOURS EVERY YEAR, ADDS AN ADDITIONAL MONTH OF PRODUCTIVITY TO HIS COMPANY!

The second category is called “Private Use” category (or General Aviation aircraft in some definitions). These are utilised by companies for transporting their own business leaders for the purpose of doing business, and sometimes, leisure. These aircraft cannot be hired commercially and must be used only “privately” for non-commercial considerations. Almost all these aircraft are bought by companies and corporates, and not by the business leaders in their personal capacity.

NSOP attracts a Basic Customs Duty (BCD) of 2.5 per cent and a GST of five per cent with Input tax Credits (ITC). Private use aircraft as considered as “sin” goods and attract a BCD of three per cent and GST of 40 per cent (recently increased from 28 per cent + three per cent Cess), thereby making the cost prohibitive. This is the segment that I plan to focus on in this article.

PERCEPTION PROBLEMS

The basic premise of the Government of India (GOI) is that private use aircraft are bought by HNIs for their own leisure, as they buy the yachts, luxury cars etc. Nothing could be further than this. As per a NBAA study, ninety per cent of flights in these aircraft are carried out to further the business of the companies that they represent. This allows the business leaders and captains of the industry to move securely, with flexibility and efficiently to add to the profits of their companies, which ultimately add to the job generation, and the GDP of the economy. Can you imagine the level of productivity and efficiency that would be achieved if Adani, Ambani or Birla were to use commercial aircraft to attend their various meetings or visit their manufacturing centers, as compared to flying in their own private aircraft? Flying privately allows them to maximise their time, and efficiency in ways that no other business tool can provide. Another NBAA study says that a CEO who uses his company aircraft for about 400 hours every year, adds an additional month of productivity to his company! You can guess what this means in real numbers for the Indian economy.

ANOTHER RULE THAT THE GOI SHOULD IMPLEMENT ON PRIORITY HAS BEEN UNDER DISCUSSION AT VARIOUS LEVELS FOR THE PAST SEVERAL YEARS. THIS IS THE CONCEPT OF AIRCRAFT MANAGEMENT AND FRACTIONAL OWNERSHIP. JUST IMPLEMENTING THIS ONE MODEL, WILL ALLOW THE LOT OF NEW AIRCRAFT TO BE INDUCTED INTO THE COUNTRY.

There are many examples on how business jets have been used by companies to enhance their efficiency and productivity. The Jamnagar refinery of Reliance is one shining example, where company aircraft carry many company officials from Mumbai to Jamnagar and back on a daily basis. I recently heard of a case of a business leader who visited four destinations in the US in three days and brought back FDI of $800M for India! Imagine if he was flying commercially, this would have taken him double the time, if not more. It’s time that GOI starts looking at Private Aviation not as “sin good”, and recognises it for what it is, that is, a tool for driving the economy. The comparison with yachts and luxury cars must stop (with all due respect to them). I have never heard of a business leader who went in his yacht or a Ferrari and brought back millions of FDI for the country! Or someone having gutka or pan masala, doing the same, for that matter!

WHAT NEEDS TO BE DONE?

One of the fundamental issues of perception comes from the way the aircraft use is defined, that is NSOP vs Private. The word “Private” is misleading, which implies that the aircraft will be used privately at the whims and fancies of the Owner, which is never the case. Most users of private aircraft are listed companies who have accountability to their Board of Directors and shareholders. There have been cases in the past in India, when a few companies were forced to sell off their company aircraft due to losses in the company and under pressure from the shareholders! Most companies have their own internal checks and balances.

The first step is to redefine the categories as “Commercial” use (for NSOP) and “Non- Commercial” use (for Private Category). That clearly gives a picture that the aircraft are either meant for reward and hire, or by the companies to further their own interests, and not for commercial purposes. In the US, the term used are “Part 135” for commercial use aircraft, and “Part 91” for no-commercial use aircraft. With this change in terminology, the perception that aircraft are being used “privately” at the whims and fancies of owners will be largely corrected.

By a fair guess, India adds about 20-25 aircraft and helicopters to its fleet every year. About 80-85 per cent of these are added in the NSOP category, and only 15-20 per cent as Private aircraft. Prior to 2007, when both categories attracted zero duty and GST, the mix was about 50/50. This only shows that at least 30 per cent of the people who are importing aircraft under NSOP, do not want to make a business out of it, and the only reason to import under NSOP is to avoid the high GST imposed on private category aircraft. The number of NSOPs registered with DGCA have increased drastically (about 130 odd) ever since the high taxes on private category were imposed. I don’t have any scientific data, but would guess that DGCA, on an average, takes about 3-4 times more manpower to oversee the operations of a commercial aircraft as compared to an aircraft which is not operated commercially. You can imagine the number of wasted man hours in oversight of pseudo NSOPs, which should not have been there in the first place!

If the GST on private category aircraft gets rationalised to a reasonable level, say 18 per cent as the first step (if not five per cent), it would be logical to say that most people would be happy to pay the GST, and use the aircraft as per their original plan, without having to hide behind the veil of operating under an NSOP. The GST that is paid, will be compensated over a period of time, by the deprecation benefits applicable, and the saving of the 18 per cent GST that must be paid for every time that the flight is used (See Appendix II). With 40 per cent GST on private aircraft, the chances are that the GOI will get minimal revenue, since hardly any company will operate aircraft in the private category, and will look for alternate routes of either NSOP, or not importing the aircraft at all and operating it under foreign registration. Everyone is a net loser in this.

Another rule that the GOI should implement on priority has been under discussion at various levels for the past several years.This is the concept of Aircraft Management and Fractional Ownership. This is a model that works worldwide, and it allows aircraft buyers to purchase an aircraft, or a part of it, and lease it out to an established NSOP to operate it on their behalf. It allows consolidation of NSOPs, and makes the job of the regulators easy, as they have to deal only with experienced and well-established commercial operators, rather than a number of small inexperienced operators, each with a single aircraft. This is a win-win for all parties. One of the main reasons this has not been implemented in India so far is because the Ministry of Finance is still struggling to figure out on how to tax these purchases. Should it attract NSOP rates or private rates? The answer seems simple. If the end use of the aircraft is to be operated under NSOP, it should be taxed as an NSOP purchase even if an individual or a corporation is buying it. Just implementing this one model, will allow the lot of new aircraft to be inducted into the country.

In conclusion, it seems that the answer seems very simple and clear. There are many solutions to fix this problem, but the first step is to understand that there is a problem. Stop killing the hen that is laying the golden eggs!